City of Shipley Employees Retirement Fund General Journal Debit Credit Accrued Interest Receivable 160 000 4 Accounts Payable and Accrued Expenses 820 000 7 Deductions Refunds to Terminated Employees 150 000 Case Study Week 5 11 30 2012 Part A 1 Cash 2 Cash Cash 5 Cash Cash 8 Cash Additions Member Contirbutions Additions Employer Contributions 3 Deductions Annuity Benefits Deductions Disability Benefits Account Payable and Accrued Expenses Additions Investment Income Interest Additions Investment Income Dividends 6 Accrued Interest Receivable Additions Investment Income Interest Deductions Change in Fair Value of Investment Investment in Common Stock Investment in Common Stock Cash 9 Investment in Bonds Deductions Change in Fair Value of Investments Investment in Common Stock 10 Additions Member Constributions Additions Employer Contributions Additions Investment Income Interest Additions Investment Income Dividends Deductions Annuity Benefits Deductions Disability Benefits Deductions Refunds to Terminated Eployees Deductions Change in Fair Value of Investments Net Assets Held in Trust for Pension Benefits 160 000 1 160 000 780 000 200 000 380 000 160 000 472 000 28 000 832 000 35 000 25 000 460 000 700 000 480 000 60 000 Part B Additions Contributions Employer Plan Member Total Contributions Investment Income Interest Dividends Net decrease in Fair Value of Investments Total Investment Income Total Additions Deductions Annuity benefits Disability Benefits Refunds to Terminated Employees Total Deductions Net Increase Net Assets Held in trust for Pension Benefits July 1 2011 Net Assets Held in trust for Pension Benefits June 30 2012 480 000 60 000 53 000 780 000 200 000 150 000 460 000 700 000 980 000 820 000 320 000 60 000 160 000 150 000 500 000 832 000 60 000 780 000 200 000 150 000 53 000 517 000 700 000 460 000 1 160 000 487 000 1 647 000 1 130 000 517 000 6 890 000 7 407 000 City of Shipley Employees Retirement fund Statement of Changes in Plan Net Assets For the Fiscal Year Ended June 30 2012 Part C Assets Cash Accrued Interest Receivable Investments at Fair Value Bonds Common Stock Total Assets Liabilities Account Payable and Accrued Expenses Net Assets Held in Trust for Pension Benefits Part D City of Shipley Employee s Retirement Fund Statement of Net Assets As of June 30 2012 430 000 160 000 5 535 000 1 872 000 7 997 000 590 000 7 407 000 One of the main differences between a defined benefit plan and defined contribution plan is that the employer is the beneficiary of a defined benefit trust and employees are the beneficiaries of a defined contribution trust A Defined Benefit Plan provides retirement benefits to retired employees based on a multiple of number of years of service and a percentage of their salary for some specified period before retirement Reporting for Defined Benefit Pension Plans requires two financial statements such as Statement of Plan Net Assets and Statement fo Changes in Plan Net Assets It also requires two supplementary schedules the Schedule of Funding Progress and the Schedule of Employers Contributions Defined Benefit Plan most commonly results in an unfunded acturial liability A Defined Contribution Plan is a pension plan that is required to pay out only the amount that has been accumulated for each employee In other words defined contribution plans provide retirement funds based on known employee and employer contributions plus investment income on those funds There is a limit how much an employer and or employee may contribute to and employee s defined contribution account per year The limit various based upon the employer s policy Both plans are generally classified as employer provided qualifid retirement plans and have similar rules for vesting and required distributions For an employee the advantage of a defined benefit plan is knowing what the payout will be at retirement given a certain amount of years of service Therefore a defined benefit plan shifts investment risk to the employer However if the employer is not able to fund or pay for the benefits the employee may not ever receive the reteriment benefits from a defined benefit plan Many of the disadvanteges of defined benefit plans are faced by the employer Employers are required to fund the plans The contributions required to fund a plan are dependent upon actuarial and management estimates This process can become very cumbersome and expensive for the employer Also because the employer is required to provide a certain benefit for the employee the employer must bear the investment risk Many employers are now moving towards defined contribution plans due to the significant nontax advantages Employers are not required make costly estimates to fund a contribution plan they simply make the contribution they have committed to make Also employers do not bear the investment risk of the investments For defined contribution plans employees generally have some direction over the way in which contributions are invested and also reap all the benefits of positive market conditions or good investments Across the country state and local governments are challenged with balancing the need to provide reasonable retirement benefits for their employees with the need to provide those benefits at reasonable costs to their taxpayers under the defined benefit plan Changes in the economy and changes in regulations are the main resons for the decline in defined benefit plans In fact the number of defined benefit plans reached a peak in 1985 and has declined continuously since then Underfunding resulted because of losses incurred in pension investments In the same manner very optimistic assumptions on the growth of investments have led to the deferral of pension payments and to the increase in the number of beneficiaries without matching increases in contributions Reducing Benefits 35 states have reduced pension benefits mostly for future employees due to legal provisions protecting benefits for current employees and retirees A few states like Colorado have reduced postretirement benefit increases for all members and beneficiaries of their pension plans Increasing member contributions Half of the states have increased member contributions thereby shifting a larger share of pension costs to employees Switching to hybrid approach some states recently implemented hybrid approaches which incorporate a defined contribution plan component shifting some investment rist to employees At the same time some states